Budget 2015 – Will it Streamline Outbound FDI?

Showcasing India as an investment destination at the World Economic Forum in the third week of January at Davos, FinanceMinister Mr. Arun Jaitley promised India has a “lot in the pipeline” for global investors. And that implicitly meant furtherliberalising the Foreign Direct Investment [FDI] rules.

It may be recalled that in one of my earlier article titled Budget 2015 – Can it restore faith in the markets I had quoted a Report of Government of India under the chairmanship of Dr. C Rangarajan which pointed out how more than 98 percent of domestic investment is funded by domestic savings.

That in turn implies Indian economy is not dependent on FDI. Not many within the establishment, media and probably within the polity realise that Indian economy is run by domestic savings that fuel domestic investments.

Be that as it may, I had pointed out in the very same article it was puerile on our part to expect foreigners would readily invest in India given the fact that even Indians are increasingly loath to invest in India.

Do we not realise that on ease of doing Business we are ranked far too below many of our competing peers? And should we forget our extortionist tax regime and creaky infrastructure?

Yet out clamour for FDI continues, even in Davos! Needless to emphasise FDI would be a function of our ease of doing business, improving investment climate and of course when domestic savings fund domestic investments. But all this need intense hard work, precise planning and managerial bandwidth – all of which are at a short supply with the Government.

Of course, the easy route is to cognise the need for improving India’s ease of doing business and also liberalise the rules for FDI. Such short cuts impress none.

But we also talk of Outbound FDI Just as for over two decade or so since we adopted the new economic policies in 1991 we have been seeking FDI into India, simultaneously we have also liberalised the outbound direct investments from India – that is permit Indians to invest abroad. In short, our FMs go and seek FDI all over the world we also liberalise outbound investments.

To a layman this must be maddening. Why permit outbound FDI when we clamour FDI into India. Well, there is a method in the madness that must be evident to the discerning eye. The Master Circular issued by the Reserve Bank of India [Liberalised further in third week of January 2015 even as our FM was inviting global investors in invest in India!] explains this in greater detail.

The RBI goes on to explain the philosophy behind permitting outbound FDI. Accordingly “Overseas investments in Joint Ventures [JV] and Wholly Owned Subsidiaries [WOS] have been recognised as important avenues for promoting global business by Indian entrepreneurs. Joint Ventures are perceived as a medium of economic and business co-operation between India and other countries.”

Explaining the benefits arising from such outbound FDI, the RBI adds “Transfer of technology and skill, sharing of results of R&D, access to wider global market, promotion of brand image, generation of employment and utilisation of raw materials available in India and in the host country are other significant benefits arising out of such overseas investments.”

That is not on. RBI believes that outbound FDI would also be “important drivers of foreign trade through increased exports of plant and machinery and goods and services from India and also a source of foreign exchange earnings by way of dividend earnings, royalty, technical know-how fee and other entitlements on such investments.”

In short, outbound FDI are geo-strategic instruments in the hands of our government and designed for a specific need. But are we using it precisely for that purpose? Or is India’s outbound FDI being misused? More to the point – Is India’s outbound FDI a huge policy loophole that facilitates routing of domestic savings abroad without the strategic intent?

Need to effectuate the strategic intent At the core of the issue is one of using domestic savings especially precious foreign exchange to invest outside India; rather it is about getting bang for the buck. This is where the intent of the policy needs to be coterminous with the facts on the ground. But the crucial question – is it?

As pointed out earlier since 1991 outbound Indian FDI was successively liberalised over a period as part of our new economic policies. Yet, till 2004-05 India’s annual outbound FDI was negligible – a mere USD 2 billion was reported in that year.

However, since 2005-06 the position turns dramatically when USD 7.8 billion was invested by Indian businesses through this route. Subsequently USD 13.30 billion was invested in 2006-07, 18.50 billion in 2007-08, 18.60 billion in 2008-09, 13.60 billion in 2009-10, 16.8 billion in 2010-11, and 8.9 billion in 2011-12.

In short, in the seven year between 2005-06 and 2011-12 India’s outbound FDI has been approximately a whopping USD 100 billion! This number by itself is scandalous for a country that struggles to get USD 10-15 billion annually as inward FDI into India.

In an article titled “Outbound FDI or a UPA-sponsored fraud” in 2013 I had pointed out “Rule of thumb indicates that at least India must be in a position to earn a minimum USD 4-6 billion annually as returns on these investments. The details pertaining to the returns from such investments are not available in the aggregate in public domain. Nor could these be gathered through RTI as the Reserve Bank of India refused to part with the information citing confidentiality provisions. Consequently, on this point your guess is as good as mine.”

Subsequently I could persuade the RBI to provide me details through repeated RTIs to provide me further information. The details are indeed shocking – the annual return from such investment from India aggregating to USD 100 billion was less than a mere billion dollars i.e. less than 1 percent. Obviously, there is a fatal flaw in our outbound FDI program.

Nevertheless questions remain: How much of the USD 100 billion are genuine investments yielding reasonable returns and how much are sunk and gone?

But there are larger unresolved questions. For instance, for the four years beginning 2008-09 to 2011-12 USD 23.31 billion was invested in manufacturing abroad, 17.03 billion in financial insurance, real estate and business services, 5.19 billion in wholesale and retail trade and 4.94 billion in agriculture and allied activities!

It may be fascinating to note that the most liberal estimates made by UPA spokesperson in the context of liberalising inward FDI in Indian retail is USD 5 billion within the next five years. And contrast it with the fact that Indian business in the four years between 2007-08 and 2011-12 has already invested USD 5.19 billion in wholesale and retail trade outside India!

Are Indian businesses so competent and competitive to invest in retail sector abroad? If so why liberalise retail and invite FDI in retail into India?

If the sectors invested surprise you, destination countries for such outbound FDI will shock you. In the four years between 2008-09 and 2011-12 we have allowed USD 14.11 billion into Singapore and 11.57 billion into Mauritius.

That is not all. Over the years we have allowed significant amount of investments into several tax havens like British Virginia Islands, Cyprus, Netherlands and of course Panama amongst others. What is galling is that some of these JVs and WoS have been used as a special pass through vehicle to route borrowings abroad to be invested into back into India, right under the nose of RBI?

Obviously, the modern version of the great Indian rope trick is India’s outbound FDI. The investment of USD 100 billion in a span of a mere seven years of which several billions have been invested into tax havens across continents is surely worrying.

Consequently, sums invested in such tax havens could vanish – especially if they are routed to other numbered accounts that define these very tax havens. Remember, this route is especially convenient to any Indian corporate that wants to pay kickbacks to powers that be in tax havens, where there are no audits, KYC norms and oversights.

Let us also not forget India’s outbound FDI allows significant sums to be invested into tax havens without any let, fear or significant oversight.

That is not all. Several of Indian banks are reported to have given loans to overseas subsidiaries of Indian corporate through their off-shore branches. Significant portion of these are reported to have been routed to India through the inbound FDI route or to the Indian Stock markets through the Participatory Notes route.

Some of these could have been used to fund pay-offs and kickbacks in the past. Some of these could be the well-planned loot of our corporate czars themselves. Some of these could be routed back into India and rig stock markets or for that matter, any other markets.